Tariffs and the stock market

It is universally agreed that international trade wars are bad for global economies. Tariffs increase prices on goods people buy. Consumers either buy less or they increase consumer debt. Tariffs hurt corporate profits, which is bad for stock prices.

However, President Trump has nevertheless decided to place tariffs on various imports — most notably against Chinese products. He recently announced another $200 billion in tariffs on Chinese imports. Other countries, including China, are retaliating by placing tariffs on American exports. About one-fifth of U.S. exports to China consist of agricultural products, including soybeans, which are by far the United States’ largest single export to China.

The Chinese stock market is down 20 percent since late January yet the S&P 500 is up about 3 percent since the beginning of the year. Apparently, the market is discounting the negative impact of potential prolonged trade wars in the Chinese market much more than it has in the U.S. market. There is a popular school of thought that President Trump is using the threat of prolonged tariffs in an effort to get a more favorable trade agreement for the United States.

Based on the fact that the S&P 500 hasn’t gone down during the beginning of these trade wars, the market seems to be optimistic that a prolonged trade war will be avoided. With midterm elections coming up, President Trump probably can’t afford the economy to take a hit or to alienate the domestic farmers who stand to suffer greatly from tariffs on their crops; at least if he wants to keep a Republican majority in Congress. Therefore, it wouldn’t be surprising to see this “trade war” get resolved prior to the elections. If that is what indeed transpires, I would expect Chinese stocks to bounce back from their significant sell off. However, if the tariffs do turn into a prolonged trade war, look for stocks to suffer.